UK’s property market yields a rental income bonanza

Investors can’t afford to lose sight of the perfect storm that is building up

It is no secret that since the 2007-08 financial crisis, it has become markedly more difficult to obtain a mortgage for private property purchases in the UK. The knock-on effect for many potential homeowners has been a need to turn to renting homes from landlords in the private sector.

The current five million rental homes in the UK represent a combined investment of over £1 trillion (Dh4.81 trillion) and none of them remains unoccupied for very long. This suggests that the current economic climate has created the ideal investment market for overseas buy-to-let investors.

With reported returns of 4 per cent and above against investment in rental homes, it is hardly surprising that buy-tolet forms a major component in many investments and fund management portfolios. For the first time since Margaret Thatcher’s government of the heady 80s created the opportunity for millions of council house tenants to purchase their own homes, renting is once again on the increase. Over half of the UK’s millennials who already own property are advising their contemporaries to rent, according to a recent poll.

With complaints from a staggering 37 per cent of those polled concerning falling values during the first year, over half of millennial owners admit that they underestimated the cost of ownership incorporating utilities, maintenance and mortgage repayments. Millennials are giving property ownership a thumbs down and demand for rental property is predicted to continue to grow dramatically.

The lower property prices in the north of the country also offer a level of diversity that isn’t found in and around the capital. If any prospective overseas investor needs an indication concerning the huge potential, it is worth bearing in mind that 46 per cent of the UK’s 21-35 year olds are already living in rented homes.

The so-called “commuter belt” is popular among those who work in the city, but either can’t afford to live there or simply prefer not to. Buying houses and apartments within commuter belts ensures a ready supply of tenants looking for a home as close to their work as they are realistically able to afford.

Transparent tax system

Housing associations and local councils are always seeking to work with owners of realistically priced properties and they also virtually guarantee a never-ending supply of tenants.

Many of the tenants provided from such sources benefit from rent allowances, which also means landlords are in effect assured of a rental income.

The great news for overseas property investors is that the UK’s tax system is pretty transparent and easy to navigate. In simple terms, anyone who rents out property in the UK is liable to tax, whether they reside in the country or not. The tax authority uses something called the “nonresident landlords scheme” to ensure the tax is paid. This stipulates that either an appointed agent of the landlord or the tenant must deduct 2 per cent of the total rental income.

Deductible expenses such as maintenance, repairs, and administration fees are, of course, deducted from the total amount of tax and this is accounted on a quarterly basis. Non-resident landlords can apply to receive rent without tax being deducted under specific circumstances.

From April 2020, mortgage repayments against buy-to-let properties owned by private landlords will no longer be tax deductible. In fact, starting back in 2017, tax relief on such payments began reducing by 25 per cent annually which means the final deductible allowance vanishes in April 2020.